Warner Partial Sale Advances EMI Bid

Warner Music Group Corp.’s search for a buyer of its publishing arm, Warner/Chappell, is partly intended to clear a path for it to buy all of British recording giant EMI Group Ltd., a person familiar with the matter said Friday.

Without the sale, combining Warner’s music publishing unit with EMI’s would have resulted in an entity so large that it would attract regulatory scrutiny, said the person, who wasn’t authorized to speak publicly and requested anonymity.

EMI’s private equity owner, Terra Firma, is nearing a default on the 3.1 billion pounds ($5.0 billion) it borrowed to buy it, and within months, lender Citigroup is expected to take over EMI, which owns master recordings of the Beatles, Katy Perry and Coldplay, among many others.

Warner, whose artists include Eric Clapton and Jason Mraz, is among the likely bidders when Citigroup is expected to try to sell the asset.

Warner is one of the few practical buyers of EMI. It is smaller than competitors Universal Music Group and Sony Music Entertainment, so purchasing fourth-ranked EMI might not trigger a long antitrust review, especially if it can divest itself of its publishing business.

Given the companies’ overlapping functions, Warner could then save costs by merging operations, the person said.

Warner’s search for buyers for the publishing business was reported earlier by the New York Times. That report set off a wave of speculation Wall Street that sent Warner Music up $1.29, or 27 percent, to close at $6.01 on Friday. That’s still down from its highest closing price in the past year of $8.01, which it reached in April.
Warner hired Goldman Sachs to help sell its publishing arm after it received inquiries in December from multiple bidders, said the person and another who also wasn’t authorized to speak publicly and requested anonymity.

One of the bidders was private equity firm Kohlberg Kravis & Roberts, which had initially been working with Warner to buy EMI, the second person said. But, after tiring of waiting, KKR turned to Warner with a proposal to buy it.

In response, Warner turned to seek other bidders and a potentially higher price. Although Warner shares are publicly traded, its largest shareholders are public equity firms Thomas H. Lee Partners with about 36 percent, Bain Capital LLC with about 16 percent and Providence Equity Partners LLC with about 8 percent.

Warner CEO Edgar Bronfman Jr. has about a 7 percent stake.
One reason why Warner sought bidders now is that publishing assets have been getting bid higher.

KKR, which has a music publishing joint venture with German media giant Bertelsmann AG called BMG Rights Management, has been trying to grow by making acquisitions.

In November, BMG announced an agreement to buy music publisher Chrysalis PLC for 107.4 million pounds, 56 percent above Chrysalis’ average stock price for the previous three months. BMG also bought up a handful of other publishers such as Cherry Lane last year.
KKR and Bertelsmann are seen as active bidders both for Warner and EMI.

A BMG spokeswoman declined to comment.

Warner’s sale process is just getting started. Rival music publisher Sony/ATV is among those interested in buying Warner/Chappell, according to a third person close to the situation, who also was not authorized to speak publicly and declined to be identified.

A Sony/ATV spokeswoman declined to comment.